Kansas state regulators closed Heartland Tri-State Bank on Friday, July 28th. This is the fourth bank to fail in 2023. Unlike the first three failed banks, Heartland Tri-State Bank was small, with four branches and assets of $139 million. As a comparison, the first three banks that failed this year each had assets over $100 billion. Friday’s bank failure is a return to the typical bank failure that occasionally took place since the 2008 financial crisis. The large majority of the banks that failed during this time were small community banks.
Also, unlike the first three 2023 bank failures, the cause of Heartland Tri-State Bank’s failure had no apparent connection to interest rate risk and similar issues facing the banking industry today. According to the Kansas Office of the State Bank Commissioner press release, “Heartland Tri-State Bank became insolvent due to an isolated event.”
One interesting thing to note regarding this bank failure was the cost to the FDIC’s Deposit Insurance Fund (DIF). The cost is based on the shared-loss agreement on the loans. The FDIC and Dream First Bank will share in the losses. According to the FDIC press release, the cost to the DIF is estimated to be $54.2 million. This is much higher than the DIF losses of past failures of banks of similar size. For example, the DIF loss of First City Bank of Florida (which had $135 million in assets when it failed in 2020) was only $10 million.
Update 8/8/23: Information about the cause of this bank failure was reported by this American Banker article, Regulator: Failed Kansas bank 'victim of a scam':
The call report with the FDIC "contained no indicators that the bank was on the verge of failing, much less such an expensive failure given the size of the bank," said Bert Ely, a principal at bank consulting firm Ely & Co.
Impact on Depositors
One similarity with the first three bank failures is that no depositors lost money, even depositors with funds that were above the FDIC coverage limits. This is due to the purchase and assumption agreement that the FDIC arranged with the acquiring bank. The FDIC press release reads as follows:
To protect depositors, the FDIC entered into a purchase and assumption agreement with Dream First Bank, National Association, of Syracuse, Kansas, to assume all of the deposits of Heartland Tri-State Bank.
Additional details for depositors are listed in the FDIC’s Q&As:
IS MY MONEY SAFE?
Yes! No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Dream First Bank.
Acquiring banks don’t always want brokered deposits, and sometimes brokered deposits are not included in the purchase and assumption agreement. As a consequence, uninsured brokered deposits are at risk of loss. That was not the case for this agreement. According to the following Q&A, brokered deposits were assumed by Dream First Bank. However, depositors will have to rely on the broker for details on accessing their funds:
WHAT HAPPENS WITH MY BROKERED DEPOSITS?
All deposits have been assumed by Dream First Bank. If you are a customer who has a Heartland Tri-State Bank deposit through a broker, you must contact your broker with any questions.
One risk that depositors of failed banks face is the loss of a high CD rate. You’ll receive the original CD rate up through the date of closure, but after the closure, the acquiring bank may choose to lower the interest rate. The CD holder is free to close the CD without an early withdrawal penalty, but if interest rates have fallen, the CD holder is unlikely to find another CD with the same rate. That shouldn’t be an issue in this case since rates are still rising. The following is the FDIC Q&A that covers this issue:
WILL I RECEIVE INTEREST ON MY INTEREST BEARING ACCOUNTS?
Yes! Interest on deposits accrued through July 28, 2023, will be paid at your same rate. Heartland Tri-State Bank’s rates will be reviewed by Dream First Bank and you will be notified in writing of any changes. You may withdraw funds from any transferred account without an early withdrawal penalty until you enter into a new deposit agreement with Dream First Bank.
Bank Failure Reminder
A bank failure is a good reminder to make sure your deposits at other banks and credit unions are under the FDIC and NCUA limits. Even though no uninsured deposits were lost, that can’t be assumed to always be the case. If the FDIC can’t find a buyer for a bank and the bank isn’t important enough for the systemic risk exception to be approved, uninsured deposits will likely be at risk.
You can cover over $250k at one bank, but you have to be careful to ensure that you and your bank follow the FDIC rules. Also, it’s probably wise to keep your deposits below $250k at any fintech, such as Raisin, that is partnering with one or more banks. Below are some references that can help you keep your deposits insured and safe:
- FDIC list of failed banks
- NCUA database of failed and conserved credit unions
- Latest FDIC info on deposit insurance